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At US banks, CDs grow but come with elevated rates

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At US banks, CDs grow but come with elevated rates

More U.S. banks are once again adding certificates of deposit to their repertoire to fund future growth and the trend seems unlikely to subside soon.

As interest rates have increased and customer demands for yield have grown in kind, banks have built their CD balances to retain what depositors they have and lock in funding before deposit costs move even higher.

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The efforts have caused CDs to grow to 13.8% of deposits in the 2018 third quarter, up from 13.5% in the 2018 second quarter and the recent trough of 12.5% of deposits at year-end 2016.

CDs usually carry higher rates than other deposit products and tend to be more rate sensitive when they mature, but the terms associated with the product allow banks to retain the funds and lock in their cost for a certain amount of time. A number of institutions have actively sought to increase their reliance on CDs for that very reason as deposit costs are rising at a quicker pace at this point in the rate cycle.

Associated Banc-Corp took actions at the end of the second quarter and in the third quarter to lock in funding for the "near to intermediate term," according to CFO Christopher Del Moral-Niles. The executive said at an investor conference in early November that his company added close to $500 million in CDs and some fixed-rate FHLB advances over the next 1 to 3 years to help position the institution for higher rates. He further noted that customer behavior has begun to change now that CD specials — promotional offerings by banks aimed at attracting new customers — are carrying rates in excess of 2%.

"CD specials might have a 2 handle on them, folks are willing to step out a little more and lock in some more. And the natural outflow from that is their interest-bearing demand account or their money market account typically, which still is priced in the 0 handle sub 1," Moral-Niles said at the event, according to the transcript.

CD rates have migrated higher with the Federal Reserve's increases in short-term interest rates. Looking at 1-year CDs with a minimum balance of $10,000, 724 banks raised rates by more than 25 basis points in the roughly three months following the Fed's late September 2018 rate increase. The top 50 institutions in that group lifted rates on those products in the range of 140 to 275 basis points. However, in late September 2018, 46 of those 50 banks had previously marketed 1-year CDs at rates below the industry average.

Short-term rate increases have pushed the industry's cost of interest-bearing deposits to 0.87% in the third quarter from 0.53% in the year-ago period. Deposit betas, or the percentage of changes in the federal funds rate that banks pass on to their customers, rose to 43.2% in the 12-month period ended Sept. 30, 2018, compared to 36.6% in the prior 12-month period.

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As deposit costs rose at a quicker pace, a number of large regional banks saw their CDs balance rise considerably in the third quarter. As was the case in the second quarter, banks with assets between $50 billion and $250 billion grew CDs the most once again in the third quarter, increasing the funding source 18.8% from year-ago levels. Banks with assets ranging from $10 billion to $50 billion followed closely behind, increasing CDs 18.5% from a year earlier.

Large banks, which easily offer the lowest rates on CDs across the banking industry, actually raised the rates on the 1-year product the most during a recent three-month period. Among banks with more than $250 billion in assets, the average rate on 1-year CDs with minimum balances of $10,000 rose 30 basis points between Sept. 21, 2018, and Dec. 28, 2018.

Wells Fargo & Co. is in that group and its president and CEO Timothy Sloan said at an investor conference in December 2018 that his company has seen competition increase for that product.

"We are seeing an uptick in terms of rates on a [1-year] market rate in CD product. So I think you're seeing that across the industry," Sloan said at the event.

The increase in the rate on 1-year CDs among larger banks compares to a 16-basis-point increase offered by the broader banking industry during the recent three-month period. Between June 8 and Aug. 24, 2018, the average rate rose by 11 basis points across the banking industry.

The higher rate offered by the nation's largest banks implies a deposit beta of 61.7% on 1-year CDs during the recent three-month period. That compares to a 33.8% beta on 1-year CDs based on the average rate offered across the banking industry during the same time frame.

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Click here for a template to help estimate the impact of deposit mix shifts on a bank's "earnings at risk."

Click here for a template that allows users to analyze loan and deposit compositions at banks and thrifts.

Commercial and savings banks report deposit information on call report Schedule RC-E, while holding companies report such information on Y-9C Schedule HC-E. These schedules can be accessed under the Regulatory Financials section of a company's Briefing Book page on the Market Intelligence website or in MI Office.